Tuesday, March 22, 2016

Rather than replicate their biography of Grove, I would rather point readers to an article Grove wrote in July 2010, How America Can Create Jobs, in which he ripped into outsourcing and free trade, and asked a fundamental question: "what kind of a society are we going to have if it consists of highly
paid people doing high-value-added work—and masses of unemployed?" (below)

It should also be noted that Grove was an immigrant from Hungary. Both the fact that Grove was an immigrant, and that he repudiated free trade, should be rubbed in the faces of Republicans, conservatives, and neo-liberals until they squeal.

Recently an acquaintance at the next table in a Palo Alto (Calif.)
restaurant introduced me to his companions, three young venture
capitalists from China. They explained, with visible excitement, that
they were touring promising companies in Silicon Valley. I've lived in
the Valley a long time, and usually when I see how the region has become
such a draw for global investments, I feel a little proud.

Not this time. I left the restaurant unsettled. Something did not
add up. Bay Area unemployment is even higher than the 9.7 percent
national average. Clearly, the great Silicon Valley innovation machine
hasn't been creating many jobs of late—unless you're counting Asia,
where American tech companies have been adding jobs like mad for years.

The underlying problem isn't simply lower Asian costs. It's our
own misplaced faith in the power of startups to create U.S. jobs.
Americans love the idea of the guys in the garage inventing something
that changes the world. New York Times columnist Thomas L.
Friedman recently encapsulated this view in a piece called "Start-Ups,
Not Bailouts." His argument: Let tired old companies that do commodity
manufacturing die if they have to. If Washington really wants to create
jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot
by themselves increase tech employment. Equally important is what comes
after that mythical moment of creation in the garage, as technology
goes from prototype to mass production. This is the phase where
companies scale up. They work out design details, figure out how to make
things affordably, build factories, and hire people by the thousands.
Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long
as that's the case, plowing capital into young companies that build
their factories elsewhere will continue to yield a bad return in terms
of American jobs.

What Went Wrong?

Scaling used to work well in Silicon Valley. Entrepreneurs came up
with an invention. Investors gave them money to build their business.
If the founders and their investors were lucky, the company grew and had
an initial public offering, which brought in money that financed
further growth.

I am fortunate to have lived through one such example. In 1968 two
well-known technologists and their investor friends anted up $3 million
to start Intel (INTC), making memory chips for the computer industry.
From the beginning we had to figure out how to make our chips in volume.
We had to build factories, hire, train, and retain employees, establish
relationships with suppliers, and sort out a million other things
before Intel could become a billion-dollar company. Three years later
the company went public and grew to be one of the biggest technology
companies in the world. By 1980, 10 years after our IPO, about 13,000
people worked for Intel in the U.S.

Not far from Intel's headquarters in Santa Clara, Calif., other
companies developed. Tandem Computers went through a similar process,
then Sun Microsystems, Cisco (CSCO), Netscape, and on and on. Some
companies died along the way or were absorbed by others, but each
survivor added to the complex technological ecosystem that came to be
called Silicon Valley.

As time passed, wages and health-care costs rose in the U.S. China
opened up. American companies discovered that they could have their
manufacturing and even their engineering done more cheaply overseas.
When they did so, margins improved. Management was happy, and so were
stockholders. Growth continued, even more profitably. But the job
machine began sputtering.

The 10X Factor

Today, manufacturing employment in the U.S. computer industry is
about 166,000, lower than it was before the first PC, the MITS Altair
2800, was assembled in 1975 (figure-B).
Meanwhile, a very effective computer manufacturing industry has emerged
in Asia, employing about 1.5 million workers—factory employees,
engineers, and managers. The largest of these companies is Hon Hai
Precision Industry, also known as Foxconn. The company has grown at an
astounding rate, first in Taiwan and later in China. Its revenues last
year were $62 billion, larger than Apple (AAPL), Microsoft (MSFT), Dell
(DELL), or Intel. Foxconn employs over 800,000 people, more than the
combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard
(HPQ), Intel, and Sony (SNE) (figure-C).

Until a recent spate of suicides at Foxconn's giant factory
complex in Shenzhen, China, few Americans had heard of the company. But
most know the products it makes: computers for Dell and HP, Nokia (NOK)
cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and
countless other familiar gadgets. Some 250,000 Foxconn employees in
southern China produce Apple's products. Apple, meanwhile, has about
25,000 employees in the U.S. That means for every Apple worker in the
U.S. there are 10 people in China working on iMacs, iPods, and iPhones.
The same roughly 10-to-1 relationship holds for Dell, disk-drive maker
Seagate Technology (STX), and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big
deal because the high-value work—and much of the profits—remain in the
U.S. That may well be so. But what kind of a society are we going to
have if it consists of highly paid people doing high-value-added
work—and masses of unemployed?

Since the early days of Silicon Valley, the money invested in
companies has increased dramatically, only to produce fewer jobs. Simply
put, the U.S. has become wildly inefficient at creating American tech
jobs. We may be less aware of this growing inefficiency, however,
because our history of creating jobs over the past few decades has been
spectacular—masking our greater and greater spending to create each
position. Should we wait and not act on the basis of early indicators? I
think that would be a tragic mistake, because the only chance we have
to reverse the deterioration is if we act early and decisively.

Already the decline has been marked. It may be measured by way of a
simple calculation—an estimate of the employment cost-effectiveness of a
company. First, take the initial investment plus the investment during a
company's IPO. Then divide that by the number of employees working in
that company 10 years later. For Intel this worked out to be about $650
per job—$3,600 adjusted for inflation. National Semiconductor (NSM),
another chip company, was even more efficient at $2,000 per job. Making
the same calculations for a number of Silicon Valley companies shows
that the cost of creating U.S. jobs grew from a few thousand dollars per
position in the early years to a hundred thousand dollars today (figure-A). The obvious reason: Companies simply hire fewer employees as more work is done by outside contractors, usually in Asia.

The job machine breakdown isn't just in computers. Consider
alternative energy, an emerging industry where there's plenty of
innovation. Photovoltaics, for example, are a U.S. invention. Their use
in home energy applications was also pioneered by the U.S. Last year, I
decided to do my bit for energy conservation and set out to equip my
house with solar power. My wife and I talked with four local solar
firms. As part of our due diligence, I checked where they get their
photovoltaic panels—the key part of the system. All the panels they use
come from China. A Silicon Valley company sells equipment used to
manufacture photo-active films. They ship close to 10 times more
machines to China than to manufacturers in the U.S., and this gap is
growing (figure-D).
Not surprisingly, U.S. employment in the making of photovoltaic films
and panels is perhaps 10,000—just a few percent of estimated worldwide
employment.

There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas.

Such is the case with advanced batteries. It has taken years and
many false starts, but finally we are about to witness mass-produced
electric cars and trucks. They all rely on lithium-ion batteries. What
microprocessors are to computing, batteries are to electric vehicles.
Unlike with microprocessors, the U.S. share of lithium-ion battery
production is tiny (figure-E).

That's a problem. A new industry needs an effective ecosystem in
which technology knowhow accumulates, experience builds on experience,
and close relationships develop between supplier and customer. The U.S.
lost its lead in batteries 30 years ago when it stopped making consumer
electronics devices. Whoever made batteries then gained the exposure and
relationships needed to learn to supply batteries for the more
demanding laptop PC market, and after that, for the even more demanding
automobile market. U.S. companies did not participate in the first phase
and consequently were not in the running for all that followed. I doubt
they will ever catch up.

The Key to Job Creation

Scaling isn't easy. The investments required are much higher than
in the invention phase. And funds need to be committed early, when not
much is known about the potential market. Another example from Intel:
The investment to build a silicon manufacturing plant in the '70s was a
few million dollars. By the early '90s the cost of the factories that
would be able to produce the new Pentium chips in volume rose to several
billion dollars. The decision to build these plants needed to be made
years before we knew whether the Pentium chip would work or whether the
market would be interested in it.

Lessons we learned from previous missteps helped us. Some years
earlier, when Intel's business consisted of making memory chips, we
hesitated to add manufacturing capacity, not being all that sure about
the market demand in years to come. Our Japanese competitors didn't
hesitate: They built the plants. When the demand for memory chips
exploded, the Japanese roared into the U.S. market and Intel began its
descent as a memory chip supplier. Despite being steeled by that
experience, I still remember how afraid I was as I asked the Intel
directors for authorization to spend billions of dollars for factories
to produce a product that did not exist at the time for a market we
could not size. Fortunately, they gave their O.K. even as they gulped.
The bet paid off.

My point isn't that Intel was brilliant. The company was founded
at a time when it was easier to scale domestically. For one thing, China
wasn't yet open for business. More importantly, the U.S. had not yet
forgotten that scaling was crucial to its economic future.

How could the U.S. have forgotten? I believe the answer has to do
with a general undervaluing of manufacturing—the idea that as long as
"knowledge work" stays in the U.S., it doesn't matter what happens to
factory jobs. It's not just newspaper commentators who spread this idea.
Consider this passage by Princeton University economist Alan S.
Blinder: "The TV manufacturing industry really started here, and at one
point employed many workers. But as TV sets became 'just a commodity,'
their production moved offshore to locations with much lower wages. And
nowadays the number of television sets manufactured in the U.S. is zero.
A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we
broke the chain of experience that is so important in technological
evolution. As happened with batteries, abandoning today's "commodity"
manufacturing can lock you out of tomorrow's emerging industry.

Wanted: Job-Centric Economics

Our fundamental economic beliefs, which we have elevated from a
conviction based on observation to an unquestioned truism, is that the
free market is the best of all economic systems—the freer the better.
Our generation has seen the decisive victory of free-market principles
over planned economies. So we stick with this belief, largely oblivious
to emerging evidence that while free markets beat planned economies,
there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian
countries in the past few decades. These countries seem to understand
that job creation must be the No. 1 objective of state economic policy.
The government plays a strategic role in setting the priorities and
arraying the forces and organization necessary to achieve this goal. The
rapid development of the Asian economies provides numerous
illustrations. In a thorough study of the industrial development of East
Asia, Robert Wade of the London School of Economics found that these
economies turned in precedent-shattering economic performances over the
'70s and '80s in large part because of the effective involvement of the
government in targeting the growth of manufacturing industries.

Consider the "Golden Projects," a series of digital initiatives
driven by the Chinese government in the late 1980s and 1990s. Beijing
was convinced of the importance of electronic networks—used for
transactions, communications, and coordination—in enabling job creation,
particularly in the less developed parts of the country. Consequently,
the Golden Projects enjoyed priority funding. In time they contributed
to the rapid development of China's information infrastructure and the
country's economic growth.

How do we turn such Asian experience into intelligent action here
and now? Long term, we need a job-centric economic theory—and
job-centric political leadership—to guide our plans and actions. In the
meantime, consider some basic thoughts from a onetime factory guy.

Silicon Valley is a community with a strong tradition of
engineering, and engineers are a peculiar breed. They are eager to solve
whatever problems they encounter. If profit margins are the problem, we
go to work on margins, with exquisite focus. Each company, ruggedly
individualistic, does its best to expand efficiently and improve its own
profitability. However, our pursuit of our individual businesses, which
often involves transferring manufacturing and a great deal of
engineering out of the country, has hindered our ability to bring
innovations to scale at home. Without scaling, we don't just lose
jobs—we lose our hold on new technologies. Losing the ability to scale
will ultimately damage our capacity to innovate.

The story comes to mind of an engineer who was to be executed by
guillotine. The guillotine was stuck, and custom required that if the
blade didn't drop, the condemned man was set free. Before this could
happen, the engineer pointed with excitement to a rusty pulley, and told
the executioner to apply some oil there. Off went his head.

We got to our current state as a consequence of many of us taking
actions focused on our own companies' next milestones. An example: Five
years ago a friend joined a large VC firm as a partner. His
responsibility was to make sure that all the startups they funded had a
"China strategy," meaning a plan to move what jobs they could to China.
He was going around with an oil can, applying drops to the guillotine in
case it was stuck. We should put away our oil cans. VCs should have a
partner in charge of every startup's "U.S. strategy."

The first task is to rebuild our industrial commons. We should
develop a system of financial incentives: Levy an extra tax on the
product of offshored labor. (If the result is a trade war, treat it like
other wars—fight to win.) Keep that money separate. Deposit it in the
coffers of what we might call the Scaling Bank of the U.S. and make
these sums available to companies that will scale their American
operations. Such a system would be a daily reminder that while pursuing
our company goals, all of us in business have a responsibility to
maintain the industrial base on which we depend and the society whose
adaptability—and stability—we may have taken for granted.

I fled Hungary as a young man in 1956 to come to the U.S. Growing
up in the Soviet bloc, I witnessed first-hand the perils of both
government overreach and a stratified population. Most Americans
probably aren't aware that there was a time in this country when tanks
and cavalry were massed on Pennsylvania Avenue to chase away the
unemployed. It was 1932; thousands of jobless veterans were
demonstrating outside the White House. Soldiers with fixed bayonets and
live ammunition moved in on them, and herded them away from the White
House. In America! Unemployment is corrosive. If what I'm suggesting
sounds protectionist, so be it.

Every day, that Palo Alto restaurant where I met the Chinese
venture capitalists is full of technology executives and entrepreneurs.
Many of them are my friends. I understand the technological challenges
they face, along with the financial pressure they're under from
directors and shareholders. Can we expect them to take on yet another
assignment, to work on behalf of a loosely defined community of
companies, employees, and employees yet to be hired? To do so is
undoubtedly naïve. Yet the imperative for change is real and the choice
is simple. If we want to remain a leading economy, we change on our own,
or change will continue to be forced upon us.